TRTX - NYSE

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the TPG Real Estate Finance Trust First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. It is now my pleasure to turn the call over to the company. Thank you. You may begin.

Good morning, and welcome to TPG RE Finance Trust Conference Call for the first quarter of 2024. The -- we are joined today by Doug Bouquard, Chief Executive Officer; and Bob Foley, Chief Financial Officer. Doug and Bob will share some comments about the quarter, and then we will open the floor for questions. Yesterday evening, the company filed its Form 10-Q and issued a press release and earnings supplemental with the presentation of operating results, all of which are available on the company's website in the Investor Relations section. As a reminder, today's call may include forward-looking statements, which are uncertain and outside of the company's control. Actual results may differ materially. For a discussion of risks that could affect results, please see the Risk Factors section of the company's Form 10-Q and Form 10-K. The company does not undertake any duty to update these statements, and today's call participants will refer to certain non-GAAP measures and for reconciliations, you should refer to the press release and the Form 10-Q. At this time, I'll turn the call over to Doug Bouquard, Chief Executive Officer. Doug?

Thank you, Chris. Good morning, and thank you for joining the call. Since the beginning of the year, the economy and labor markets continue to be remarkably resilient across the U.S. The market remains highly confident in the soft landing for the U.S. economy and global demand for risk assets remain strong. More recently, however, inflation has proved challenging to tame and the interest rate market has adjusted its expectations for rate cuts in 2024 over the past few weeks. Further, the 10-year treasury yield has moved nearly 80 bps during the first 4 months of the year and is now approaching 4.7%. Within broad credit markets, corporate credit spreads are at multiyear [ tights ] while real estate credit spreads have rallied in certain areas, but do continue to underperform on a relative basis. Once again, this combination of factors provides mixed signals to real estate investors. On one hand, broad market demand for risk assets, a strong economy and low [ unemployment ] should provide tailwinds for real estate valuation. And we do see these trends flowing through in our portfolio. On the other hand, a volatile and elevated interest rate environment tends to reduce transaction activity for pressure on values and increase the financial burden on borrowers. This uncertainty is compounded by the shifts we are seeing within the real estate credit landscape from a lending perspective. Banks continue to retreat from direct lending and pivot their attention to lower [ to loan ] financing, which does benefit TRTX by providing attractive funding sources for its loan portfolio and new originations. We continue to invest TRTX's balance sheet with these competing forces in mind, and our quarterly results reflect our strategic position. During the first quarter of the year, our approach to capital deployment and risk management remained consistent with prior quarters. Given the market backdrop, we continue to focus on: one, maintaining elevated levels of liquidity, two proactively risk managing our investment portfolio; and then three, continuing to position our balance sheet to be able to take advantage of the dislocation in lending markets in 2024 and beyond. Over the past quarter, TRTX's performance reflects both the dedicated focus of our asset management team and the benefits of TPG's broad global investment platform. Our loan portfolio is 100% performing and both our CECL Reserve and risk ratings reflect very modest change over the past quarter. From a property type perspective, 50% of our loan portfolio is multifamily despite the pressures on values within the multifamily sector, we continue to see ample liquidity for both debt and equity transactions. While we acknowledge the Fed signaling to slow rate cut may put pressure on both near-term values and borrowing costs, we remain confident in the long-term underlying fundamentals of the housing sector broadly. In terms of new investments during the quarter, we originated 3 senior mortgage loans totaling $116 million, 100% of which these loans are secured by multifamily properties. We continue to prefer lending in this sector given the downside protections available in today's market environment. From a liquidity and leverage perspective, we ended the quarter with $370 million of liquidity across both cash and other available liquidity channels and a debt-to-equity ratio of 2.21. While the discount to book value at our current share price has compressed since we last spoke, we continue to believe that this discount is significant and that our shares offer a compelling value proposition at today's price. To that end, on April 25, our Board of Directors approved a share repurchase plan of up to $25 million, demonstrating the Board and management's confidence in the value of TRTX shares. In summary, the past quarter represented an important turning point for TRTX as we begin to deploy capital with a slightly more offensive bet. The resources in deep experience of TPG's real estate debt and equity investment platform grants us unique insights into valuation shifts and capital flows across the real estate landscape. While we acknowledge elevated borrowing costs may increase financial stress on our borrowers, we remain confident in our ability to navigate the ever-evolving real estate credit landscape and are pleased with how our company is positioned to create long-term shareholder value. With that, I will turn it over to Bob for a more detailed summary of this quarter's performance.

Thanks, Doug. Good morning, everyone, and thank you for joining us. Our first quarter results reflect the benefit of a 100% performing loan portfolio, a further reduction in interest expense due to continued optimization of our liability structure, including the reduction of interest expense quarter-over-quarter of $7.4 million or $0.10 per share and nearly full deployment of approximately $247.2 million of reinvestment cash in our FL5 CRE CLO. For the quarter, GAAP net income attributable to common shareholders was $13.1 million as compared to $2.6 million for the preceding quarter. Net interest margin for our loan portfolio was $26.8 million versus $21.3 million in the prior quarter, an increase of $5.5 million or $0.07 per common share due to further optimization of our liability structure and the absence of higher cost financing for nonperforming loans, of which we have none. Our weighted average credit spread and borrowings declined quarter-over-quarter to 195 basis points from 204 basis points. Distributable earnings were $23.3 million or $0.30 per share. Coverage in the quarter for the quarter of our $0.24 dividend was 1.25x. Distributable earnings before realized credit losses was $23.3 million or $0.30 per share versus $24.4 million or $0.31 per share in the prior quarter due to an improvement in net interest margin, offset by a reduction in noncash credit loss expense. Our CECL Reserve increased slightly to $74.1 million from $69.8 million due primarily to worsening macroeconomic and generic loan default in [ loss data ], embedded in the [ TREP ] database and model we use to forecast our general CECL loan loss reserve. We had no 5-rated loans, no specifically identified loans, thus no specific CECL loan loss reserve at quarter end. Our CECL reserve was 210 basis points versus 190 basis points in the prior quarter. Book value per share is $11.81 as compared to $11.86 last quarter due primarily to the slight increase in our CECL reserve. Multifamily now represents 50% of our loan portfolio. Office has declined 68% over the past 9 quarters to 20.4%. Life Sciences is 11.4%, hotel is 9.9% and no other property type comprises more than 3.3% of our portfolio. Regarding REO, we have 5 REO properties, 1 multifamily property and 4 office properties with a total carrying value of $192.4 million and a blended current annualized yield on cost of 6%. REO represents a mere 5% of our total assets. Using the substantial resources of TPG Real Estate, we made significant progress during the quarter in advancing value creation and realization strategies for each REO investment. Regarding our multifamily property in suburban Chicago, we've already improved leased occupancy by more than 10 points to 93%. Refer to footnote 4 of our financial statements for a snapshot of our REO portfolio. Regarding credit, our weighted average risk ratings were unchanged at 3.0. All of our loans were performing. We had a small number of changes in risk ratings during the first quarter. Refer to Page 52 of our Form 10-Q for more detail. Regarding liabilities and our capital base, we remain focused on maintaining high levels of non-mark-to-market, nonrecourse term financing. At quarter end, such arrangements represented 77.1% of our borrowings as compared to 73.5% at December 31. Our total leverage declined further to [ 2.2:1 from 2.5:1 ] at December 31. We have $4.7 billion of total financing capacity across 12 discrete financing arrangements. During the quarter, we extended the investment period under our existing secured credit facility with Goldman Sachs for 2 additional years through 2026 and tacked on a 2-year [ term out ] provision through 2028. Our only scheduled debt maturity in 2024 is $1.8 million under a credit facility we expect to extend or repay and terminate during the second quarter. We were in compliance with all financial covenants at March 31, 2024. At quarter end, we had $51 million of reinvestment capacity available, which we used in mid-April. We deployed into loans during the quarter, roughly $196.2 million of reinvestment cash. The reinvestment windows are now closed for all 3 of our [ extent ] CRE CLOs, although we remain able to substitute in exchange loans under certain circumstances. Regarding liquidity, we maintain high levels of immediate and near-term liquidity, roughly 9.7% of total assets. Cash and near-term liquidity was $370.7 million at quarter end, comprised of $188.1 million of cash in excess of our covenant requirements. $51 million of CLO reinvestment cash since deployed and $116.6 million of undrawn capacity under our secured credit agreements. As of last Friday, our cash position in excess of covenant requirements was actually higher to [ $235.5 million ] due to loan repayments and receipt of a $26 million service receivable in connection with the loan sale that closed during the fourth quarter of 2023. During the quarter, we funded $10.7 million of commitments under existing loans. At quarter end, our deferred funding obligations under existing loan commitments totaled only $163.8 million, a mere 4.6% of our total loan commitments. In summary, a quarter characterized by strong operating performance, solid credit, further optimization of our liability structure in terms of cost, non-mark-to-market borrowings and extended [ tenor ] and significant liquidity through a balanced stance versus the market. And with that, we'll open the floor to questions. Operator?

Thank you. [Operator Instructions] Our first question is from Stephen Laws with Raymond James.

Congrats on a nice start to the year, Bob and Doug. Nice to see -- the stability here over the last couple of quarters. I wanted to touch on the CLO. I think it was around $50 million of replenishment capacity at quarter end. Did that get filled with a loan that was funded on a bank line or were there some originations post quarter end? Can you talk to that? And maybe more generally kind of your origination pipeline and how you think about moving leverage from the current [ 22 ] over the course of this year?

Stephen, with respect to the $51 million of CLO cash that we deployed in April after quarter end, in that particular instance, we actually took an existing loan that had been financed with the bank and deposited it into the CLO, which actually generated about $11 million or $12 million of cash. We were -- we had borrowed less from our bank counterparty with respect to that loan, then there was cash in the CLO. So we ended up netting about $11 million or $12 million on our balance sheet cash as a consequence of that redeployment. And the cost of funds was clearly lower in the CLO than it was on the bank finance -- and the coupon on the loan didn't change. It's resonance is now different. It's CLO, not a bank financing arrangement. And I'm going to ask Doug to address your question about investment activity.

Stephen, so on the investment side, we're excited about the fact that [ we're on ] activity more offensive and have a very active pipeline currently. If you look at our originations in the first quarter, which were 100% multifamily, we do still favor that sector, particularly now being able to deploy capital at what is a lower LTV combined with, obviously, values are along the way they were in 2021, '22. So we still need to account them, one. But two, frankly, we're being selected. I think I mentioned earlier in my remarks about the sort of mixed signals that we're getting from both the sort of macro picture and then also locally within real estate. So we're being respectful of where we are within the market cycle, but we are definitely able to play offense and we continue to pursue new investment opportunities to help drive earnings growth for the company.

Great. Appreciate the color on both of those topics. Bob, I wanted to touch base on the debt side. And you mentioned this in your prepared remarks about the Morgan Stanley facility that matures, I think, at the end of this week. You really don't have anything drawn down on it, right? So curious to your thoughts on the pros and cons of extending it versus letting it expire -- even without it, you still have excess of $1 billion of capacity on your bank lines. What are the commitment fees that you would have to pay if you extend it? And then larger picture, debt covenant coverage ratios, I know it reverted back to [ 1.4 ] at quarter end and you're in compliance with that. Can you maybe update us on where you stand with the ratio?

Sure. So first, with respect to our particular arrangement with Morgan Stanley. Morgan Stanley has been an important financing partner of ours since we went public in 2017. We've got a great relationship with them and they with us. I think we don't have much borrow with them right now for 2 reasons. One is we haven't recently found a commonality between our credit box and theirs. And two, our financing focus has, for a number of years now, shifted strongly in favor of non-mark-to-market [ mass ] term, nonrecourse financing, hence, all the note on note and CLO financings that we've done since 2018. Bank financing has remained an important part of our financing strategy because it is very flexible, and it moves quickly. But we have spent a considerable amount of time over the last several quarters, evaluating each of our counterparty relationships and in determining where it makes sense to continue and where it may not make sense for us to continue. And then -- so that's that. With respect to financial covenants, we were -- we did -- we were in compliance at quarter end as we have been in each of the previous quarters. We had, as you pointed out, obtained from all of our lenders because we have harmonized financial covenants across all of our borrowing [ arrangements ], a waiver arrangement that allowed our [indiscernible] coverage ratio to temporarily fall below 1.4x. We're above that. We're very low levered at this point, and we would expect as we invest more and perhaps use more leverage that since we don't use a ton of leverage, the interest coverage even at the high benchmark rates that we experience today will continue to be satisfied. So I hope that answers that question. And with that, I'll ask Doug, he's got a comment about the financing markets more generally.

Yes. And Steven, I think you do bring up a really important trend that we're seeing. And as I think about the first quarter, the demand from the banks for loan-on-loan business is definitely as strong as we've seen it, frankly, in a couple of quarters. And I think that's really [ conjure ] by a few things. One is banks continue to pull back on direct lending. And if they are going to be doing direct lending, they're generally pivoting more towards CMBS execution rather than actually a long-term balance sheet investment. And then secondly, capital rules continue to kind of push banks towards providing back leverage to platforms like TRTX. So I think on the positive side, as we think about our pipeline through 2024 and beyond, that amount of demand, I think is a really positive tailwind for our platform is a trend that we expect to continue over the coming quarters.

I think Doug's earlier comment about mixed signals in the market, I think, sort of highlights this particular point, which is demand by banks to provide financing is quite strong. I mean, we have a ton of inbound inquiry from our existing counterparties about borrowing more from them. The nature of the financing that they're providing to the CRE world has clearly shifted as Doug described. And honestly, spreads are coming in with respect to secured financing that can be obtained by lenders like us. The investment sales market for properties and the financing market for those transactions, that environment is a little more opaque and a little less clear right now, which is really the point that Doug was making earlier. So there's an interesting technical thing going on right now. Now where financing costs are coming in, but loan spreads are kind of all over the place.

Our next question is from Rick Shane with JPMorgan.

Steve actually covered a lot of the ground I was interested in on the facilities. One thing, looking at the extension of the Goldman facility, spread stays the same. I am curious if there are any changes to the terms that we should be aware of, any sort of refinement of the credit box going forward?

No. No material changes. We pay for financing on a pay-as-you-go basis. And Goldman has been another very important business partner of ours. They were actually our first credit counterparty when we were a private company. And your point about credit box, each -- we've talked about this before, we view our liability, our portfolio liability providers and the construction of that portfolio is being as important as constructing our investment portfolio and everybody's credit box is a little bit different. But when stitch together what we want and what we have is a mosaic that works for our business. In the case of Goldman, we're pretty simpatico. I wouldn't say that there's been a change in credit profile at all. And those decisions are made, honestly on a deal-by-deal basis.

Got it. Okay. That makes sense. And yes, obviously, given the history with Goldman, that's a significant renewal. Look, the other question is, as you sort of change your footing and start to move back into making more loans, I'm curious what you're finding in the market. And is capital deployment going forward, going to be idiosyncratic every quarter, we're going to hear about some deployment, and it's going to be very much a story, hey, we found this opportunity. This is why we love it. Or is it going to be thematic, -- there is something in the market that you're going to be targeting, whether it's a geo or property type or like I said, a thematic approach to [ reemerging ] the market.

Yes. I mean I would say really for us at the top of the list, we do think about investing within the real estate space from a thematic lens, and that's really kind of borne across both our debt and equity platform. One, as we think about fees, we really, I would say, are very much strong to a few things. One, we've mentioned our [ supplies for ] housing and actually do acknowledge that, again, multifamily values are down from the peak, but where we can make new loans today at 65% LTV, acknowledging that [ fee ] is now potentially 15% to 20% lower [indiscernible] attractive entry [indiscernible] that's really one. I would say, too, from a [ team ] perspective, when you kind of get a little more granular and you're really out there looking at new investments. I'd say there's kind of 2 areas that I think are particularly attractive to really focus on. One is new acquisition activity is obviously going to be a big for all. I think wherever we see fresh capital coming in reflecting today's market value [ test ], that's attractive. And then I would say, secondly, if there was a part of the market that's probably most interesting, it really continues to be trafficking within the area of where regional banks had been lending. I think that still is probably -- it's a story that's obviously out there very broadly about banks pulling back, but acknowledging that of all the outstanding commercial real estate debt held by banks, about 75% resides in the regional banks. And those regional banks continue to [ really ], I'd say, not pull up. And we've seen that in Q1 as we're out there [ repeating help ] loans. So again, really viewed as a bias towards housing, one. Second advise towards new acquisitions -- and then as we think about capital deployment going forward, we've really positioned the balance sheet where we can navigate what I describe the sort of mixed signals that we're getting from the market [indiscernible]. And that's exactly kind of how we do think about liquidity and we think about new investments going forward.

Doug, that's really helpful. I am curious as you start to look at multifamily, if you would just give some sort of context where cap rates were previously where you see deals getting done today, and that's it for me.

Yes, sure. I mean look, I think multifamily, obviously, is a very, very heavily debated sector right now, just kind of given all the -- kind of right at the heart of the confluence of some of the macro trends with interest rates and inflation. I think that where we're seeing new transactions get done, generally speaking, happened in the sort of mid- to high [ 5% ] cap rate range. That tab feels like from a liquidity perspective as multifamily cap rates get into [ 6s ], there is a lot of liquidity on the equity side. And I think as the cap rates get, let's call it, inside of 5.25% where that liquidity dries up. So again, I view it as the sort of midpoint is to pick a number of 5.75%. And that's again, which allows us to be making loans from a risk perspective at stabilized debt yields in the 7.5% to 8.5% range, again depending on the property type of [indiscernible] specifics to that certain asset.

Our next question is from Eric Dray with Bank of America.

Most of them have been covered, but just wanted to ask about how -- have conversations with borrowers changed at all over the last month is kind of the rate outlook has changed a bit? And kind of what you're hearing from your [indiscernible] borrowers?

Yes. No, I think it's a great question. I think that broadly been narrative with obviously, the slowing of expected rate cuts combined with, I would say, the sort of what feels like over the past few weeks, a little bit of a slowdown in terms of that transaction activity. I think that's been kind of more of the dialogue that we've been hearing about. Relative to our current portfolio, obviously, bearing in mind the 100% performing. I think that we generally kind of would characterize the borrowing universe as still looking through the long term is a fact where long-term rates will settle and still kind of [ really ] positive in terms of their ability to get to kind of weather the storm with elevated [indiscernible] in the near term. And that's -- I'd say that's the best way to characterize the mindset. So as that evolves, of course, I have to keep the update, but that's where kind of where the market is right now. And again, we're definitely at a pre-point, narrative wise, just kind of what's going on within macro. I would say that despite our intimate knowledge of what's going on in the ground in the real estate sector, given our share broad lens through which we invest, keeping an eye [ frankly ] on what the Fed is doing and saying, I think this is really important, and we're very [ attuned ] to that message.

All eyes are on 2:15 pm Eastern Time today.

Definitely. Okay. Awesome. And then real quick, just I guess for modeling purposes. I mean -- do you think that kind of the $0.30 [ DE ] that you posted this quarter? I mean, is that kind of like where you guys think the portfolio can kind of maintain here in the next few quarters? Or any like onetime things to call out?

We never provide guidance, but I think that it backward into that number and its composition, I think it's pretty easy to see what's being generated by the loan book and what's being generated by our small REO portfolio. So we've been pretty clear about our dividend policy and our view about sustainable levels of distributed earnings and so on. But we're comfortable with our current position but can't provide any guidance.

Yes. I think just to give perhaps a little bit more context, which is helpful. As you think about the sort of levers that we have to grow earnings, I would just kind of think [indiscernible] lower balance sheet looks like. First and foremost, we have a substantial cash balance of that, combined with other available liquidity channels, [ holds ] approximately $371 million currently. Secondly, we are out there with a pipeline of potential investments that we could potentially pursue over the coming quarters. So just from a new investment perspective, that, of course, will drive earnings. And then lastly, again, Bob's comment, we have approximately 5% REO in fact, as we navigate through those assets and maximize value that also can be recycled into newer loan investments, which will also grow earnings over time. So I kind of view that as the [ through a broader qualitative ] [indiscernible].

Our final question is from Chris Muller with JMP Securities.

Congrats on a great start to the year. So following up on some of the prior questions. So now that you guys are back to lending and the portfolio is cleaned up, should we expect to see some portfolio growth in the back half of this year? Or will it be more of a flattish-type portfolio? And I guess the root of the question is how aggressively do you guys want to match repayments with new loans over the coming quarters?

Look, I'd say that we're -- from a strategic perspective, we really kind of built the balance sheet to kind of still what I described is like a sort of all-weather outcome here again, acknowledging those mixed signals. Where we are kind of currently sitting today, I would say it so kind of [ leans ] more towards the offensive. So from a deployment perspective, I would expect us to be able to find new investments in the coming quarters. So as we think about kind of repayments, repayments so far definitely have slowed that will be one of the byproducts, frankly, of both elevated rates, but also more probably elevated rate [ fall ] right now. But I would say, generally speaking, as I mentioned earlier about the 3 levers that we have to grow earnings. I would describe our ability and appetite to generate new investments is frankly at the top of the list to be able to grow [indiscernible].

Got it. That's helpful. And then the other one I have. So with some of your CLO financing out of the reinvestment period, can you just give your thoughts on if a new CLO is possible in 2024 and just how you guys are viewing that market today?

Yes, sure. I mean I think there has, of course, been a handful of series CLO done recently in the market. It's a bit of an interesting dynamic right now where the available financing that were being provided from just bank balance sheet continues to be more attractive than what we see with the series CLO market. Given that we're active, really kind of both of those, we're always looking on a daily basis of, frankly, the sort of delta between what kind of advance and spread in terms we can get from banks on the balance sheet versus what the sort of bond market will bear. And specifically but we will continue to optimize that going forward. So I would say spot right now. Again, to my comment earlier on banks just seem to have a lot of demand to put capital out. They're restrained on putting out direct lending capital and they definitely have a lot of demand to be providing [indiscernible] financing for us. So I think that's really how we're looking at it. But -- when we think about the series CLO market, series CLO, of course, are a really important part of our capital structure. They do provide say, frankly, a lot of flexibility from a financing perspective and then you, of course, offer the benefits of master non-mark-to-market, [indiscernible] financing. So as we balance advance in spread, there also is the kind of structural side of things. But again, I think at this point, series CLO spreads have really kind of lagged and the looking to have it [indiscernible] what I had mentioned earlier about the sort of [ moving ] corporate credit spreads close to the [ types ], but you really haven't seen series CLO spreads move back to, frankly, where they were. You think about the types over the last 3 or 4 years, I mean, AAAs were really as tight in about, let's call it, approximately at the time, LIBOR plus [ 80% ]. Now we're still seeing series AAA spreads in the kind of mid- to high 100s best case. So there's still think a lot of compression to happen on the series CLO spreads [ side ].

Before we conclude the Q&A, we do have a follow-up from Rick Shane with JPMorgan.

Having asked so many questions over time about repurchases and I think I'd be remiss not to address that. It's nice to see you guys announce a repurchase. I'm curious how you will approach that. It's a $25 million allocation. Do you expect to be pretty consistently in the market? Or is that something that will just be there very defensively if you see some really bad days?

Yes. Look, I think on the share repurchase side, first and foremost, it's a tool or tool kit, which we acknowledge and have [indiscernible] over time is really a powerful way for us to both [indiscernible] earnings for the company. And also, I think there's a real statement about the fact with the credit quality of our current book relative to book value buying shares at today's market price for us does look very attractive. In terms of going forward, all I can say at this point, Rick, is that it will continue to be a tool of our tool kit. And I said that over time, we will continue to use this as a potential way to drive our company.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to management for closing remarks.

Just want to thank everyone for taking the time [ to join in ] the call, and look forward to speaking to all of you next quarter. Thank you very much.